Homeowner insurance rates are skyrocketing. Advisors are sharing ways individuals can create a financial safety net should catastrophe or environmental risks, like wildfires and flooding, impact their homes.
Lindy Venustus, CEO and founder of Create Financial Planning, says individuals must fully understand what their homeowner insurance policy covers. She also emphasizes they should know what it doesn't cover.
“Will it replace only the shingles that are damaged, the section of roof damaged, or the entire roof?” Venustus said. “Water is rarely a covered claim. So make sure you understand what coverage you have for backup of sewer and drain and/or flooding.”
The same goes for taking a hard look at your deductible. “If you are not going to make a small claim for fear of your premiums going up or fear of it being cancelled, increase your deductible and lower your annual premiums,” she explained.
Venustus also suggests homeowners have a separate emergency fund for their home, “where you have the deductible saved, in addition to saving every year around half [a percent] of your home's value.”
“For example, if you have a $500,000 home, save at least $2,500 a year. Let it grow for big noninsurance covered expenses like a new furnace, nonstorm-damaged, or older roofs,” she added.
Know Your Risks
Regarding environmental risks like wildfires or flooding, Venustus recommends individuals check risk maps published by the Federal Emergency Management Agency before moving or purchasing a home.
She lives in Minnesota, which experiences substantial flooding in certain parts of the state. Most properties near flood-prone areas are required to get insurance from FEMA. That is separate from their homeowner insurance, Venustus shared.
On the heels of unprecedented wildfires throughout Southern California — which AccuWeather estimates will bring an economic toll of $250 billion to $275 billion to the region — homeowners and renters must also contend with the fact that several insurers have either stopped or reduced their coverage in the state in recent years.
In general, home and property damage risks related to environmental disasters are only growing as a result of climate change.
A 2023 report by the U.S. Congress Joint Economic Committee found wildfires in the U.S. cause between $394 billion and $893 billion in annual damages. That's equivalent to 2%-4% of the country’s GDP. Some economic costs included in the tally were lowered real estate values, lost income, insurance payouts, property and infrastructure damage, evacuation costs, and health-related costs caused by deaths and injuries.
“The total cost estimates in this report should be viewed as a likely undercount of the true total cost, as there are several costs connected to wildfires that have not yet been fully quantified by researchers,” the JEC report said.
“Insurance premium costs from wildfire risk are estimated at $1.6 billion,” the report found. “Premiums in wildfire-prone states, like California and Colorado, have surged or become unattainable due to insurers pulling out of markets that they deem too exposed to wildfire risk.”
Homeowner Insurance & State-Run Programs
As a last resort for California residents and businesses that can’t find a traditional insurer to cover their home or property, there is a state-run FAIR Plan. This plan offers basic fire insurance coverage. After the recent wildfires, however, the plan has been pushed to the brink of insolvency. That's because it covers recent claims from wildfire victims in the state, the Los Angeles Times reported in January.
Allan Roth, founder of Wealth Logic LLC, noted that California’s “last resort” insurance will be “very tapped because of the wildfires” and ensuing claims paid out.
He works with many clients in California and said one client had to evacuate because of the recent wildfires, though his home was thankfully spared.
“Climate change is making some insurance unobtainable. But it is costing us all more since insurance companies spread the risks and costs across all policyholders,” Roth explained. “We don’t have hurricanes or earthquakes where I live. But I’m paying more insurance because of these losses. We definitely have wildfires, which has caused our homeowner insurance to increase.”
It May Be Worthwhile to Consider Self-Insuring
Insurance costs have grown so much that Roth has advised clients to drop their homeowner insurance, or only insure the bare minimum. He understands this may be a controversial take.
“The vast majority of my clients, I’m having them drop insurance. An insurance company expects to make money, so they have to cover their costs. Whenever you buy insurance, the odds are you’re going to lose. You should only insure for what you cannot afford to lose,” Roth shared. “Drop some of the bells and whistles of policies, and increase some of the deductibles, which is essentially self-insuring.”
He recognizes some individuals will be uncomfortable with this idea, even if they are high earners.
“Many people don’t want to drop their homeowner insurance, even though they live in less expensive $200,000 to $300,000 homes and they make mega millions,” Roth said. “I’ve got people who lose or make that amount of money in the stock market in a day. [Yet they won’t drop their insurance despite being able to pay certain costs out-of-pocket].”
Some homeowners don’t see dropping their insurance as an option. But he recommends they shop around for the best options and go through their policies with a fine-tooth comb.
“Fight inertia and shop. Go to an independent agent and get some quotes. Go to some captive insurance agents, like Geico,” he says. A captive insurance agent is one that is only permitted to sell policies for a single insurance company.
Additional Considerations for Homeowners
Venustus, who has also worked in the insurance industry, offered some tips for those who can no longer get homeowner insurance.
“Plan to self-insure if you want to be in an area that is no longer offering coverage. That may mean having access to hundreds of thousands of dollars in the case of your home being damaged or destroyed,” she wrote in an email.
Additionally, she recommends homeowners use the “most current, up-to-date weather-resistant building materials and designs,” if building a new home in a hurricane or fire-prone area.
Also, renters need insurance in place too, especially in the case of catastrophe.
“Please get renters insurance,” Venustus said. “It's inexpensive. And it can help pay for you to live somewhere else until your place is livable or you find a new home. It [could] help replace your clothes, furniture, kitchen, and personal items. It could even cover some food costs if a kitchen is not included in your new temporary home. And that's even if the damage to your place is from smoke from a neighbor.”
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